The Hidden Advantages (and Disadvantages of GPOs)

Over on E-Sourcing Forum, Michael Lamoureux recently penned a post commenting on a CPO Agenda article suggesting that there are a number of problems with the approach of many group purchasing organizations (GPO). What's the primary issue, you ask? According to Michael's analysis of the piece, "one of the major problems with the original GPO model, which is still used by many of the GPOs still in the market today, is its myopic focus on cost savings. Organizations join because they think that volume-based buying will allow them to get their office supplies, energy, and contract labor cheaper, but end up saving very little and then develop a bad taste for the GPO model ... [but] just like Procurement needs to focus on total value on each and every buy they make, a GPO also needs to focus on total value on each and every buy they make on behalf of its customers."

The post goes onto suggest that we need more touchy-feely GPOs that focus on the experience outside of cost savings (e.g., networking among members). Unfortunately, I could not disagree more. The primary problem with GPOs is indeed cost -- and that many do not offer enough savings to justify organizations using them for anything but a handful of contracts at which they excel. But rather than simply push breadth, GPOs should push depth and total cost. For example, can a GPO guarantee not just a cost savings on the unit cost or service level, but also insure invoice accuracy? In the case of office products, that would be huge (considering that the sales and billing organizations of many of these providers intentionally try to find creative ways to overcharge on an invoice basis). In regards to joining a GPO for networking, would you want to be a part of an organization that does many things OK, but nothing great? No. Leave the networking to industry groups -- ISM, IAACM, SIG, CAPs, Corporate Executive Board, etc. These groups specialize in bringing executives and managers together to learn.

GPOs can redeem themselves from the past. But to overcome their tattered image, they'll need to play up the cost card in a major way and show why the 80% solution is really the 100% one on a category-by-category basis given the added hassle of going through one-off sourcing and auditing processes versus simply buying off of a leveraged contract with some guarantee of not getting screwed on the back end of the process (or, ideally, letting the GPO handle the payment stream). While I do not believe that a GPO will ever be able to negotiate a better deal for companies with significant spend in a category -- after all, they're earning anywhere between a 2-10% kick-back from suppliers -- I believe that they can become a viable alternative to category sourcing and outsourcing if they can successfully play up the cost card and hassle factor.

- Jason Busch